Does HECS debt affect your home loan? [And what to do about it]

There’s more to it than you think
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In this article, you’re going to learn exactly how HECS/HELP debt will affect your home loan application.
I’ll show you:

  • How Much Your HELP Debt is affecting your home loan
  • How to Calculate Exactly how much it is reducing your borrowing power
  • How to check what you owe on your HELP debt
  • Lots of case studies and real-life examples

Let’s get started.


Chapter 1: Does HECS debt affect your home loan?

In this chapter, we’ll cover the basics of HECS debt.
First, you’ll get to understand how HECS works.
Then I’ll show you how much it will affect your home loan application.
(And yes, it will definitely affect your home loan)


How does a HECS/HELP debt work?

In Australia, citizens can borrow money from the Australian Government to pay for the course fees. 
This loan is called HECS-HELP.

  • Higher Education Contribution Scheme (HECS)
  • Higher Education Loan Program (HELP)

From 2011 to 2016, at a Bachelor Degree level, the number of Australian’s completing higher education increased by 23%.
And, at the Post Graduate level by a whopping 45%. Insane!
Higher Education Growth
So more and more students are taking on a HECS/HELP Debt.

How does it work? 

During your studies, the government pays the amount of the loan to your education institution. 
Then, once you are finished studying and start earning an income, your loan repayments will begin. 
These repayments are made directly to the Australia taxation system and is often shown on your payslip. 
The fine print? 

  • ✅ Repayments are made by those earning over $45,881 per annum. 
  • ✅ People living overseas are not required to commence repayments until returning to Australia.

But you can make voluntary repayments at any time.
So if you took out a HECS-HELP loan many years ago…
And you still have money owing on it.
It’s time to start considering how this will affect your borrowing capacity. 

Why will HECS affect my home loan application?

At the start of any loan application, you will need to disclose any outstanding debts.
(That includes your HECS-HELP loan)
Depending on what you’re earning financially, you may already be repaying the debt, or you might have deferred it.

Wait, how do I defer it?

As explained above, if you are earning less than $45,881 per annum OR if you are living overseas. In these circumstances, the debt is put on hold until you fulfil the repayment criteria. 
So when applying for a loan, simply put, your lender will look at this debt in a similar way to other personal liabilities. From there, your financial situation will be determined around this debt.
But wait, not all debt is created equally.
I’ll get to that in the later chapters.

How can a HECS debt affect my borrowing power?

In short, it reduces your assessable income. 
And in some cases, it can be by a significant amount. 
I’ll show you by exactly how much in a scenario below.

How does it work?

Your income will be reduced by the percentage (per annum) of repayments that you’re making. 
So if you’re earning $60,000 and making repayments at 4% of your income, your debt would lower your borrowing power by 4%.
But the good news is, different lenders have different criteria. 
Be transparent with your mortgage broker about your HECS debt from the beginning. This will help your broker choose the right lender for you.

Case Study: Sarah’s HECS loan, and how it affected her home loan 

Sarah recently got in touch with our Mortgage Brokers to arrange a loan for her first home.

  • ✅ Sarah is earning $91,500 before tax
  • ✅ She has a credit card with a limit of $20,000
  • ✅ The HELP repayments on her payslip were 6.5% of her income or $495 per month.

first home buyer help debt
Based on Sarah’s situation her maximum borrowing capacity was $400,000.
The kicker was, she only owed $1,450 on her HELP debt.
So by repaying her HELP debt, her borrowing capacity increased from $400,000 to $480,000!
If she closed her $20k credit card her borrowing capacity would jump all the way up to $600,000!!!
Would you like to know our borrowing power? Chat to our mortgage brokers, or call us on 1300 088 065.

Why can credit cards have a significant impact on your home loan?

While we’re on the topic of debt, let’s look at other forms of debt that can impact your loan. 
Credit cards can have a significant impact on your loan, especially if you have a large credit limit available.
For example, Talulah has a $30,000 credit limit on her credit card. 
When she moved house, she spent $800 for a new couch on the credit card. And she is still slowly paying off. 
Yet when Talulah goes to apply for a loan, the $800 is looked at, along with the total $30,000. 
This amount is removed from her borrowing capacity.

Why did a credit card make this big a difference?

Because at any moment Talulah could potentially spend the other $29,200 available.
Talulah needs to lower her credit limit on the card to $1,000. So that the other $29,000 is not considered by the lender.
This type of debt is considered BAD debt. 
Each form of debt that you have will also be looked at and lower your borrowing capacity too. 
home buyer with HELP debt (1)
Other types of debt include:

  • ✅ A car loan
  • ✅ Credit card loans
  • ✅ Personal loans (i.e. holiday loans)
  • ✅ Afterpay and GoMoney Cards

So try to reduce your overall debt in general before applying.
Something else that catches people out is Interest-Free cards from Harvey Norman… And Afterpay. 
Just like a credit card, while you may not be using this money and have nothing owing to your name; the lender will look at this as potential money you could borrow. 
So it’s best to close any of these accounts that are not in use.
If you’re getting a little excessive with Uber Eats or dining out a few nights a week, that’s also something to slow down on.
Lenders will go through your bank statement with a fine-tooth comb. So start saving, (or spending) money more responsibly in order to prepare.

Chapter 2: How to check HECS debt?

Now that you have identified the effect that HECS debt has on your borrowing capacity. 
It’s time to figure out the next step.
Do you know how much you’ve got left to pay on your loan?
And how can you minimise this?
Let’s get right into it.

How to check HECS debt 

Checking HECS debt is easy.
Jump on to your myGov account, and you’ll immediately be able to see how much you’ve got left to pay.
If you don’t have an account, you can set up one through the ATO website. 

How much are my HECS Repayments? 

HECS repayments are determined by how much you’re earning. 
The lender will take this percentage, and take it off your entire loan.
So let’s take a look at an example.

Case Study 2 – Layla’s HELP Debt

Layla is earning $70,890 per financial year, and her HECS repayment rate is at 4.0%. 
If she applies for a home loan debt-free and pays down her HECS loan, her borrowing capacity will be at $480,000.
Borrowing Capacity Before
However, with her current HECs debt, Layla applies for a home loan and her borrowing capacity drops by $22,000. 
The 4% per annum has been taken off her overall income, changing it to $68, 054. 
In result, Layla can borrow $458,000 with her current HECs/HELP debt.
Borrowing Capacity After
Read More: How Much Home Can I afford [Calculator]

The difference between interest and indexation

You’ve just checked your HECS account and noticed that it’s gone up and not down?
This is because of indexation. 
Indexation-HELP debt
A HECS/HELP debt is raised in line with the cost of living each year. 
So whatever the indexation rate is, your loan will increase with it.
Yet there’s no interest on the loan. 
So when it comes to comparing a HECS debt with credit card debt, the student loan is a much better type of debt to have. 
Interest-free means that even if you take years to pay off the loan, the indexation is minimal in comparison.

Chapter 3: How do I get my HECS debt written off when applying for a home loan?

Your next step is to decide whether you will go ahead with your application with or without the debt.
And make no mistake:
When it comes to getting finance, every little bit counts.
In this chapter, I’ll cover what to do if you still have a significant HECs debt.

HELP! I still have a significant HECS/HELP debt!

If you’re like me and went travelling for a few years. And in turn, got behind on the HECS repayments. 
You’re probably wondering what to do with your HECS debt.
Don’t forget that this advice is not specific to your personal circumstances. Contact our team for a chat about your situation.
But if we’re speaking in general terms, a HECS debt is the best (well cheapest) kind of debt you could have.
While it does affect your overall borrowing capacity, the amount of money you pay each year towards the loan is small. 
So when it comes to deciding whether to pay it down or not, it really depends on where your income is at. 
But we’ll get to this in further detail in a moment.

Should I make voluntary repayments?

This really depends on where you sit with your financial situation.
If you ONLY have HECS debt and no other forms of debt, need to increase your borrowing capacity AND you have some spare cash.
Well, why not.
But if you have other sources of debt, that are considered to be bad debt like personal loans, car loans and credit cards. 
These have much higher interest rates. 
So this form of debt is where you should start. 
After that, student debt follows. 
And then money into property and shares which are considered good debt can come into play.
In summary, student debt isn’t “make or break” when it comes to applying for a home loan. The good thing is, most people have a HECs/HELP debt. So it’s a pretty common aspect of applicants applying for a home loan.

Should I pay off my HECS/HELP debt before I apply for a home loan?

As I said above, HECS debt is one of the better (cheaper) debts you’ll ever have.
Going back to my earlier question of whether or not you should pay it off—before you apply for a home loan—here’s the answer.
If the amount of money that you owe on the loan is small enough for you to pay off, then it is worth it. 
(As we covered in Sarah’s scenario above, paying out the $1,450 HELP debt increased her borrowing capacity by $60,000!)

What happens if I still have a high HELP balance?

If you’re still sitting within a reasonable amount left to pay on your HECS debt. Say, over $10,000, and it would be taking a significant amount off your savings, then no.
In this case, it’s not worth paying it off, because it will leave you with less for other expenses.
The more critical debts to get rid of, are car loans, personal loans and credit cards. 
Not all debt is created equally! 
And this is the perfect example of how exactly it works.
The ultimate goal should be to save for a deposit. HECS doesn’t have any interest and takes off a small amount of your income. So pay it down, but gradually works just as well.

Chapter 4: How can I increase my chance of loan approval

Now that you’ve got your estimated borrowing capacity in check. And know what to do with your HECS loan. It’s time to increase your chances of approval.
Let’s take a look.
So in this chapter, I’ll show you the right (and wrong) way to increase your chances for home loan approval.

How can I improve my chance of qualifying for a home loan with HECS debt?

Yes, HECS debt adds a little extra hurdle to your loan application.
But, the good news is, there are a few ways to improve your chances of qualifying,
Let’s do this.

Reduce existing debt

Sorry to sound like a broken record. 
But reducing existing debt is a great way to increase your chances of home loan approval. 
Consolidate your debt where you can. 
But pay attention to different interest rates that come with different terms. 
Adding the debt to your new mortgage is not always a good idea. 
Why? Because it’s a 30-year time frame which will significantly add to your overall interest paid.

Check your credit

Good credit. Bad credit. Some credit. No credit.
If you’re not sure where your credit stands, get in touch with our team to review.
Some people do a credit check and find out that they’ve got bad credit, without even realising.
It could be anything, like a missed payment from over five years ago while you were overseas. 
So before you apply for a loan, always do a credit check.
This will help your mortgage broker determine the best lender for you, depending on your credit record. 
And you will then be able to take steps to improve your credit status once you know where you stand. 

Save, save, save away.

Trust me. Even I’m sick of telling you about the s-word. And I wish I didn’t have to include it as a point in this article, but it’s the truth! 
Before you’re ready to apply for a home loan, make sure that you have been steadily saving.
For at least three months or more, if possible. 
Regular deposits into a savings account will show the lender that you have discipline. 

Speak to us (brokers)

In case you missed the memo, we are here to help.
Yes, you.
By speaking to a broker before going ahead with your application, you will be able to make sure that you qualify. 
Your broker will check that you have all the paperwork and strategies in check. And they will also negotiate for the best rates on your behalf. #winning
If you would like to chat, get in touch with our mortgage brokers or give us a call on 1300 088 065.

Be honest and always be conservative with income and asset estimation. 

Just like I said about telling your broker about the HECs debt, try to establish a transparent and honest approach with them. 
We see all kinds of situations every day. 
(And generally, it’s shown on your payslip)
So even if you’re embarrassed about your financial situation, we deal with financial stress and unique situations all the time. 
We’ve probably heard it before anyway!
Which brings me to…

Be conservatives with your financial estimates. 

Any extra expenses like childcare or phone bills that you haven’t factored in are essential. 
What about your yearly earnings? 
A lot of first home buyers include their superannuation into their yearly income.
But this money doesn’t go into your pocket, so it should be left out. Making a sound estimate will help you stay in a stronger financial position later on. 

Overapplying won’t help.

Every time you apply for a home loan, the lender will review your credit file. This review process is added to your credit file.
The next lender will be able to see a history of each time you have applied for a loan. 
And there is no outcome stated on your credit file. 
So it could be assumed that your previous application was unsuccessful. In turn, this history can be seen as a red flag by lenders.
In summary, only apply for a loan when you’re 100% ready. And have all of your ducks in a row.  

Did I miss anything?

Now I’d like to hear from you.
What are you going to do about your HECS loan? Pay it off right now, or keep it?
Or maybe you’ve got another plan of attack?
Either way, let me know by leaving a comment below right now.

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Approximately 40% of home loan applications were rejected in December 2018 based on a survey of 52,000 households completed by 'DigitalFinance Analytics DFA'. In 2017 to 2018 Hunter Galloway submitted 342 home loan applications and had 8 applications rejected, giving a 2.33% rejection rate.
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